U.K. Economic Forecasts Cut as E&Y Sees Osborne Missing Target

Britain is struggling to recover from a recession, which has reduced tax receipts and put pressure on Chancellor of the Exchequer George Osborne ’s budget plans. Photographer: Simon Dawson/Bloomberg

Oct. 15 (Bloomberg) -- Britain’s economy will shrink this
year as weakening global demand offsets an improvement in
consumer spending, hampering the government’s deficit-reduction
plans, according to the Ernst & Young ITEM Club.

Gross domestic product will fall 0.2 percent this year and
rise 1.2 percent in 2013, the London-based group said in a
report today. It previously forecast stagnation this year
followed by 1.6 percent expansion. While consumer spending will
propel growth in the second half, the euro-area crisis remains a
threat, it said.

Britain is struggling to recover from a recession, which
has reduced tax receipts and put pressure on Chancellor of the
Exchequer George Osborne’s budget plans. The International
Monetary Fund cut its 2012 global growth forecast to 3.3 percent
last week, which would be the weakest since 2009.

“With exports being battered by the euro-zone crisis and a
weakening outlook in markets such as the U.S., India and China,
the U.K. is relying heavily on the high street to come to the
rescue,” said Peter Spencer, chief economic adviser to ITEM
Club. While the fundamentals “are in place,” it’s “not the
balanced, long-term sustainable growth we were hoping for.”

Consumer spending will rise 0.6 percent this year and 0.8
percent in 2013 as disposable income increases, ITEM Club
forecasts. Exports will increase 0.6 percent in 2012, though net
trade will subtract from GDP.

Credit Conditions

The report noted the signs that credit conditions are
easing after the Bank of England and the government introduced
their Funding for Lending program to boost lending in August.

“One of the biggest headwinds facing the U.K. has now
begun to ease -- lending has started to loosen up,” Spencer
said. “The big question is the extent to which consumers will
choose to grasp the opportunity or continue to deleverage and to
pay down their debts.”

The ITEM Club also forecast that Osborne is set to miss his
borrowing target this year. The deficit will decline at a slower
pace in the coming years than the Office for Budget for
Responsibility has projected, it said. Osborne is due to publish
the Autumn Statement, in which the government updates its fiscal
and economic forecasts, on Dec. 5.

If the OBR judges this shortfall to be structural it would
“effectively compel the chancellor to introduce further
austerity in order to comply with his fiscal mandate,” ITEM
Club said. “However, in our view this would be difficult to
justify and we would argue that any shortfall is more likely to
be a function of weak demand than any damage to the supply side
of the economy.”

Separately, Lloyds TSB said the squeeze on consumers’
finances is continuing, with discretionary real spending power
falling 0.9 percent in September from a year earlier. U.K.
inflation probably slowed to 2.2 percent in September from 2.5
percent in August, economists said in a survey before a report
tomorrow. The Lloyds report said annual income growth was less
than that, at 1.7 percent.